Lennar To Face Heat As Interest Rate Hike Negatively Impacts Home Ownership Affordability, Says Analyst

Lennar To Face Heat As Interest Rate Hike Negatively Impacts Home Ownership Affordability, Says Analyst
  • JMP Securities analyst Aaron Hecht reiterated a Market Outperform rating on the shares of Lennar Corp LEN and lowered the price target to $115 from $130.
  • The analyst said the company beat Q3 FY22 normalized EPS expectations driven by stronger-than-expected homebuilding gross income and lower SG&A expense.
  • However, Hecht thinks the future results will likely be pressured for Lennar and the homebuilding industry, as significant interest rate increases over the last six months have negatively impacted home ownership affordability.
  • Hence the analyst lowered the price target to reflect a sharper correction in the housing market than previously anticipated.
  • He added pressure would be most evident in declining margins as management should prioritize velocity over profitability.
  • During this next stage of the homebuilding cycle, the analyst expects Lennar to increase market share and benefit from strong cash flows (as inventory normalizes), which should provide capital structure optionality.
  • Considering the capital stack and valuation, Hecht cites the best use of excess capital will be share buybacks at this point in the cycle.
  • He also believes the spinoff of non-core assets into the Quarterra vehicle will enhance valuation.
  • Price Action: LEN shares are trading higher by 3.07% at $80.56 on the last check Tuesday.

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